Navigating uncertain futures is one of the inherent challenges of business ownership. Factors beyond your control, like market trends, economic fluctuations, and technological advancements, could have a major impact on your business’s performance. Even changes within your organization, like growing or shrinking staffing needs, changes in inventory, or a sudden uptick in demand could rattle your business if you’re not prepared.
Financial forecasting helps your business prepare for whatever the future may bring by using historical data, current trends, and other insights to make predictions and projections. An effective approach to financial forecasting could help your business overcome operational fluctuations and safeguard it from unpredictable outliers.
Key Considerations
- Financial forecasting uses a business’s existing performance history as well as external factors like market trends to make predictions about the company’s financial future.
- Qualitative forecasting focuses on expert opinions and market research, while quantitative forecasting emphasizes data and metrics. You may incorporate both approaches into your forecast.
- Effective financial forecasting helps businesses tackle problems early, mitigate risks, and identify opportunities.
What is Financial Forecasting?
Financial forecasting uses data about a business, the overall industry, and the economy to make predictions about future operational and financial performance.
For an established company, forecasting often involves analysis of past performance data, like balance sheets, profit and loss documentation, and monthly or yearly cash flow records.
New businesses still benefit from financial forecasting but may lean more on data from comparable organizations and broader industry conditions. While there are multiple approaches to financial forecasting, it typically weaves in relevant market and general economic factors, like inflation rates. Quantitative and qualitative insights come together in financial forecasting to paint a comprehensive picture of your organization’s future. Your business may perform long-term financial forecasting to develop realistic plans for growth or business acquisition and short-term financial forecasting to make revenue projections.
The purpose of financial forecasting is to gain a realistic understanding of your business’s current financial standing and trajectory. Forecasting could help you establish a working budget, make sales projections, manage your inventory, or identify the right time for business debt consolidation or expansion. With a grounded and thoughtful financial forecasting process, you could make informed monetary decisions and seize the right opportunities for advancement.
The Difference Between Financial Forecasting and Budgeting
Financial forecasting and budgeting go hand in hand, but they’re not interchangeable. A financial forecast outlines what an organization may realistically accomplish within a given timeframe, based on a range of observable variables and the business’s precedent.
A budget, on the other hand, outlines what a business hopes to achieve during a given period (usually a year). Budgets incorporate revenue, expenses, and debts to direct a company toward certain financial goals, like increasing profits or generating more working capital. When the year ends, businesses typically compare their actual outcomes with their budget to assess performance.
Financial forecasting may provide a blueprint your team could use to build a business budget. Depending on your approach, you may also use financial forecasting to determine whether your business is on track with your budget.
Financial Forecasting Methods
Your business may take any number of approaches to forecasting. The right tactic depends on your goals.
Most financial forecasting methods fall into one of two categories: qualitative forecasting, which emphasizes expert insights and market trends, or quantitative forecasting, which emphasizes data from your company’s history. A holistic approach to financial forecasting may incorporate elements of both categories.
Qualitative Financial Forecasting
Qualitative financial forecasting makes projections about a business’s outcomes based on the opinions of experts and patterns gleaned from market research.
One process for expert review is called the Delphi method.* Using this approach, a facilitator from within your organization or a contractor may reach out to experts with surveys, questionnaires, or interview requests to gather their informed opinions about your business’s prospects. Once your company receives those analyses, the facilitator sends them to additional experts for review and comment, until a cohesive forecast forms.
Your business may also conduct market research to better understand competition, consumer habits, and the overall status of your industry. A qualitative approach is particularly useful for startups seeking funding since they may not yet have extensive historical data. By gathering insights from seasoned professionals and examining current market dynamics, businesses can make informed forecasts even in the absence of past performance statistics.
Even if your company has an extensive history and wealth of data, incorporating qualitative techniques could offer more nuance to your projections.
Quantitative Financial Forecasting
Quantitative financial forecasting relies on a thorough assessment of various financial metrics to identify patterns and trends. A quantitative analysis usually requires extensive data, such as revenue, liabilities, losses, expenses, investments, and equity. A financial forecaster may employ a variety of statistical techniques to interpret this data.
One common technique within this approach is the straight-line method, which assumes a company’s growth rate will remain constant over time. Projections are based on that consistent growth rate. This method is particularly suitable for established businesses operating in stable industries. Other quantitative methods speculate based on revenue and spending averages within a specified timeframe.
By leveraging historical data, quantitative forecasting provides a structured and objective basis for financial predictions.
Benefits of Financial Forecasting
Financial forecasting makes it possible for your company to anticipate financial challenges and business opportunities, so you can tackle whatever comes your way. For small business owners, securing a tailored business loan through BHG Financial can support these forecasts by providing necessary capital with flexible terms1 that suit your specific needs. Additionally, it includes the convenience of fast funding and dedicated support.
Let's review a few ways an effective financial forecast can empower your business:
Discover Problems Quickly
By regularly monitoring financial projections against actual performance, businesses can spot discrepancies and address underlying problems promptly. For example, if sales consistently fall short of projections, your business may have a strategic or logistical problem to resolve.
Early detection of problems allows businesses to take corrective action and avoid more severe financial difficulties down the line.
Minimize Financial Risk
Forecasting can help businesses mitigate risk by offering insight into potential downturns they may otherwise overlook. That way, businesses may reallocate resources or set aside emergency reserves in preparation for the major obstacles.
For example, if a forecast predicts a decline in revenue due to market trends, your business can implement cost-saving measures or diversify its product offerings to offset the anticipated impact. This proactive approach to risk management builds resilience.
Take Control Over Cash Flow
Effective cash flow management is crucial for business survival and growth. Financial forecasting may help your business maintain a healthy cash flow by predicting potential surpluses or shortfalls.
By determining when cash is likely to be tight, businesses can make informed decisions about expenditures, investments, and financing needs. For example, if you anticipate a dip in revenue around the holiday season, you may seek a business loan to bridge gaps in working capital.
Find the Right Business Financing
Lenders and investors often require detailed financial projections from businesses to assess risk before offering credit or funding. A well-prepared financial forecast demonstrates a business's understanding of its financial position and prospects. You can also consult your financial forecast to determine the business loan or credit options that best suit your financial needs and aspirations.
How a Business Loan from BHG Financial Could Meet Your Business Needs
The financial forecasting process may expose a wide range of business needs or open your eyes to new opportunities for growth. BHG Financial offers flexible small business loans of up to $500,000,1,2 which can be tailored to your company’s unique circumstances. With repayment terms of up to 12 years,1 you can increase working capital, acquire a business, or otherwise expand your operation with affordable monthly payments. Use our payment estimator to see how a BHG Financial loan may fit into your financial future.
Financial Forecasting FAQs
How can I do a financial forecast for a business plan?
Without historical data to work from, a new business may rely on tools like expert opinions and market research for financial forecasting. Information like consumer habits, competitor performance, and industry trends could shape the financial forecasting that you incorporate into your business plan.
What’s the difference between financial forecasting and financial modeling?
Financial forecasting and financial modeling are similar concepts, but they serve different purposes. Financial forecasting involves making financial projections and estimations based on historical data and market trends. Financial modeling, on the other hand, is the development of complex mathematical models that simulate various financial scenarios and theorize their potential impacts on a business.
